Paying lower-cost avoiders to reduce pollution could reduce the total cost of pollution control.

In December 2005, Starbucks announced that it will increase its purchase of renewable energy from 5% to 20% of the energy it takes to power its North America Company-operated stores. (Starbucks). But most Starbucks stores are not hooked up to renewable energy. So instead of using renewable energy directly, it pays extra to subsidize wind farms to make their power affordable to nearby users to offset 20% of its dirty power.

Similarly, environmentally-conscious individuals driving a gas guzzler can now buy a $80-a-year green tag from TerraPass to offset its annual emissions. The fee is then used to subsidize and hasten the development of less polluting renewable energy production.

The green-tag cost could also be viewed as a way to internalize the external cost of using fossil-fuel energy.

Buying one’s way out of pollution guilt sounds like a cop-out. But it is based on a time-honored economic principle of efficient cost reduction. Power companies faced with pollution quotas have long resorted to reducing pollution indirectly by buying unused quotas from other power companies that can reduce pollution at lower cost. Some even help developing countries to reduce low-hanging-fruit pollution just to offset their own pollution. To reduce global pollution, what matters is that the overall amount of pollution is reduced. And when the marginal cost of reducing pollution at some sources is lower, then total cost would be reduced if most of the reduction is done at these sources (see Pollution Control)

Going green for retail businesses such as Starbucks and Whole Foods carries an environmental cachet that appeals to a green clientele. Green tags are also a cost-efficient way for industrial companies to meet pollution regulations. A further source of demand for pollution offsetting may be coming from other developed countries that have subscribed to the carbon-restricting rules of the Kyoto accords. Their multinational corporations are likely to make their US operations follow the same global pollution standards.